Home Customized jerseys Advantages and Disadvantages of Managed Accounts Vs. TDF

Advantages and Disadvantages of Managed Accounts Vs. TDF

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The beauty of a target date fund (“TDF”) is that you can just sit back, relax and enjoy the show. You have nothing to do. If it’s the default investment option in your 401(k), you don’t even have to make the decision to go for it. The plan does it for you.

But TDFs raise some questions. Increasingly, 401(k) plan participants are looking for alternatives. And more and more plans are starting to provide these alternatives.

One of these alternatives is what is called a “managed account”. Is it good for you ?

“A managed account will be a bit more personalized than a target date fund,” says Michael Fischer, director, wealth adviser at Round Table Wealth Management in New York. “The investment manager may change allocations based on market conditions and will generally incorporate a broader market selection than target date funds. Target date funds are typically comprised of an underlying broad equity fund and a fixed income fund. A managed account may contain other asset classes like REITs or commodities and may be more focused on market styles like value or growth.

It is now understood that one size does not fit all. This is the fatal flaw of a TDF. But just because a TDF isn’t right for everyone doesn’t mean it’s not right for some people.

“A TDF is one size fits all, and it’s clearly not a good fit for many plan members,” says Linda Erickson, founding partner and financial advisor at Erickson Advisors in Greensboro, North Carolina. “A larger account, a more knowledgeable or experienced investor, may benefit from a managed account that can take on more or less risk than an age-based TDF. For smaller or start-up plans, a TDF choice is a good choice for inexperienced participants who may not have to choose a managed fund.

For these people, the opportunity to set it and forget it is just too good to pass up. They are satisfied with what they get and the inconveniences do not concern them. If you’re worried or not sure if you should be worried, you should consider something like a managed account.

“TDFs are great for people who set it and forget it and who are comfortable living their financial lives by ‘rules of thumb,'” says Erik Sussman, founder and CEO of the Institute of Financial Wellness. in Fort Lauderdale, Florida, “The advantages of managed accounts over TDFs are that they are not ‘cookie-cutter’. Rather, a TDF is a unique model with investment allocations based on timing. As you get closer to the “target retirement date”, the portfolio becomes more conservative. Managed accounts can be more personalized to your goals and needs. For example, you can choose to be more aggressive in your 401(k) because you have other safe buckets outside of your retirement account and this can be best accomplished with professional money management as opposed to a TDF. asset allocation in an account managed against a TDF. »

This customization and flexibility is therefore the main advantage of managed accounts over TDFs.

“TDFs tend to maintain allocation to asset classes throughout your life trajectory, adjusting overall allocation only slightly,” says Fischer. “For example, the Vanguard 2045 and 2050 target date funds only have a 2% difference in their equity allocation. Over the next 5 years, the 2050 maturity fund will only seek to rebalance slightly by reducing equity by 2%. A managed account may be more aggressive or more conservative, given general market conditions, and may fluctuate more from year to year.

What exactly does “personalization” mean? It means different things to different people. Why? Due to the relevance of the number of factors involved. These factors may be critical to one person, but irrelevant to another. Where do you fall?

“Managed accounts typically consider multiple personal data points such as age, risk tolerance, income, gender, and other assets to determine the appropriate asset allocation between stocks, bonds, and cash. “says Paul Swanson, Vice President, Retirement at Cuna Mutual. Group in Madison, Wisconsin. “The TDFs only take age into account. Thus, an older investor with a large account balance, complex planning considerations, and substantial outside assets might benefit from the customization offered by managed accounts, while a younger investor with little or no outside assets would very well in a TDF.

One of the things to keep in mind about customization is that it’s not necessarily meant to provide higher returns. It is intended to put you at ease and give you a better chance of aligning your retirement portfolio with your personal situation.

“In theory, a managed account can provide a more accurate asset allocation for an investor compared to a TDF if a participant is committed, enters the appropriate data, and has sufficiently differentiated investment needs or objectives,” says Bill. Ryan, Partner at NEPC. , head of defined contribution solutions in Chicago. “However, the extent to which this customization changes the investor’s asset allocation may be relatively small, and the benefit may not be realized by most and may be hindered by the additional fees of managed accounts.”

You will likely pay more for a managed account than a TDF. You’ll have to consider whether the potential comfort is worth the extra cost. Keep in mind, however, that this cost will be higher if the managed account includes investment products rather than just stocks or bonds.

“A managed account will be more expensive than a target date fund,” says Fischer. “Target date funds will have a very attractive fee offer of around 0.15-0.5%. A managed account will typically have an ‘assets under management’ fee as well as the underlying product fees. The investment manager should strive to top their respective fees, but for those who are fee sensitive, the target date fund may be a more attractive option.

One of the ways a managed account outperforms is in its ability to react immediately when market opportunities arise. This can be particularly important depending on where the interest rate cycle is today.

“With a managed account, your risk can be managed based on what’s happening in the markets in real time rather than at a pre-determined time in the future,” says Matthew Grishman, Director, Wealth Advisor at Gebhardt Group , Inc. in Roseville, California. “TDFs have a built-in flaw that is not often discussed in public conversation. Generally speaking, TDFs will slowly move from stocks, which are perceived to be more risky, to bonds, which are perceived to be less risky , as you get closer to retirement. There is a major flaw in this thinking. Bond prices are generally affected by the direction of interest rates. As rates fall, bond values ​​rise. As rates rise, bond values ​​generally fall.We are currently in the lowest interest rate environment in US history, which also means that we are at or near an all-time high in bond prices/values ​​If rates begin to normalize and rise over the coming months and years, we may begin to see price depreciation across the bond market gatekeeper, just as many TDFs are beginning to switch from equities to bonds. The outcome could be disastrous for TDF investors nearing retirement, if they begin to see a spike in interest rates coinciding with their target retirement date.

Another popular aspect of managed accounts is their transparency. Unlike mutual funds, including TDFs, you don’t have to search for information about what’s in them. (And even when you find out what’s in a mutual fund, there’s usually a big disconnect between what you see reported and what’s actually there.)

“In TDF, holdings are held in a fund format, and understanding what’s held in the fund requires a bit more research,” says Todd Scorzafava, director/partner at Eagle Rock Wealth Management in East Hanover, New Jersey. “You need to look at information that the fund discloses or that is provided by other resources to see what stakes are held. TDFs, however, give you time to focus more on what you should be contributing to the fund versus the “time needed” to manage it yourself. TDFs also do a lot for you automatically, rebalancing and adjusting for you over the years.

The real risk with managed accounts is that you could choose an advisor who is in crisis. Worse still, it’s something you won’t know for years, so you’re taking a chance.

“You could be ‘stuck’ in investments that aren’t right for you if you don’t have a good financial advisor to guide you and make the necessary changes if and when your goals and objectives change,” says Sussman. “The key here is that you need to have a committed and involved advisor. If they aren’t attentive to your situation and the changing economic environment, you might have been better off saving the fees and d invest in a TDF.

Either way, not all plans offer managed accounts. “They are less available in most 401k plans,” says Scorzafava. “TDFs are becoming very popular in Retirement/401(k) plans. Again, the pros and cons are mostly up to the individual and the right person, with the goal being to take action and invest to help you reach and get through retirement.

Remember that there may be other choices in your 401(k) plan. If so, be sure to check out these articles: